Problem

Effect of inventory errors on financial statementsThe following income statement was prepa...

Effect of inventory errors on financial statements

The following income statement was prepared for Bell Company for the year 2012:

BELL COMPANY

Income Statement

For the Year Ended December 31, 2012

Sales

$69,000

Cost of goods sold

(38,640)

Gross margin

30,360

Operating expenses

(9,100)

Net income

$21,260

During the year-end audit, the following errors were discovered.

1. A $1,400 payment for repairs was erroneously charged to the Cost of Goods Sold account. (Assume that the perpetual inventory system is used.)


2. Sales to customers for $2,400 at December 31, 2012, were not recorded in the books for 2012. Also, the $1,344 cost of goods sold was not recorded. The error was not discovered in the physical count because the goods had not been delivered to the customer.


3. A mathematical error was made in determining ending inventory. Ending inventory was understated by $1,200. (The Inventory account was written down in error to the Cost of Goods Sold account.)

Required

Determine the effect, if any, of each of the errors on the following items. Give the dollar amount of the effect and whether it would overstate (O), understate (U), or not affect (NA) the account. The effect on sales is recorded as an example.

Error No. 1

Amount of Error

Effect

Sales, 2012

Ending inventory, December 31,2012

Gross margin, 2012

Beginning inventory, January 1,2013

Cost of goods sold, 2012

Net income, 2012

Retained earnings, December 31,2012

Total assets, December 31,2012

NA

NA

Error No. 2

Amount of Error

Effect

Sales, 2012

Ending inventory, December 31, 2012

Gross margin, 2012

Beginning inventory, January 1,2013

Cost of goods sold, 2012

Net income, 2012

Retained earnings, December 31,2012

Total assets, December 31,2012

$2,400

U

Error No. 3

Amount of Error

Effect

Sales, 2012

Ending inventory, December 31, 2012

Gross margin, 2012

Beginning inventory, January 1, 2013

Cost of goods sold, 2012

Net income, 2012

Retained earnings, December 31, 2012

Total assets, December 31, 2012

NA

NA

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